Microsoft Q3 earnings and revenue up, as all divisions make gains

In the wake of dismal PC sales reports from market researchers, Microsoft shows that Windows sales increased

Microsoft increased revenue across all its divisions in its third fiscal quarter, achieving an almost 20 percent revenue increase year on year.

For the quarter ended March 31, 2013, Microsoft generated revenue of US$20.5 billion, up 18 percent compared with the same quarter of 2012, the company said Thursday.

Net income came in at $6.06 billion, or $0.72 per share, compared with $5.1 billion, or $0.60 per share, in 2012's third quarter.

On a pro forma basis, factoring in certain one-time items, including net revenue recognition for Windows and Office upgrade offers and pre-sales, as well as the European Commission fine, revenue was $18.8 billion and earnings per share were $0.65.

The Business Division, which includes Office, increased revenue 8 percent to $6.32 billion. Adjusted for the revenue recognition of the upgrade offer and pre-sales, revenue grew 5 percent.

Microsoft launched the new version of the Office desktop productivity application suite at the end of January, introducing for the first time the option to license the product as an annual subscription. It remains to be seen whether that model will catch on with consumers accustomed to paying for Office once and getting a "perpetual" license for it.

The Server & Tools business racked up $5.04 billion in revenue, up 11 percent, helped by strong sales of SQL Server and System Center.

The Windows Division brought in revenue of $5.7 billion, up 23 percent, but adjusting for the revenue recognition related to the upgrade offer, the revenue growth was flat. This division also includes the Surface tablets.

Revenue shot up 18 percent to $832 million at the Online Services Division, spurred by a 22 percent increase in online advertising revenue.

The Entertainment and Devices Division had revenue of $2.53 billion, up 56 percent, but when adjusted for the revenue recognition related to a video game deferral, revenue rose 33 percent.

CFO Peter Klein said in a statement that the company's "diverse business continues to deliver solid financial results." Microsoft also announced that Klein will leave the company at the end of the fiscal year and that a replacement will be named in the coming weeks.

The earnings report comes about a week after IDC reported that global PC shipments plunged almost 14 percent year on year in the first quarter, its biggest quarterly decline ever, blaming the disaster in part on "a weak reception for Windows 8."

In a conference call to discuss the results, Klein said that Windows revenue has been affected by the shift from PCs to tablets, but he said Microsoft is confident Windows 8, with its redesigned, tile-based interface for touch devices, will do well.

"The overall addressable markets are growing, and we're excited by the opportunities ahead of us," he said.

Klein acknowledged, however, that "the transition is complicated" because of the size of Windows' hardware and software ecosystems. "We still have an immense amount of work to do," he said.

Since the launch of Windows 8, Microsoft has updated a number of its native applications, and an upcoming upgrade code-named Blue will further refine the OS, he said.

"We feel good about the foundation we have laid and are optimistic about the long-term success of Windows," he said.

In addition, new touchscreen devices built for Windows 8 have been released recently and more are on their way from OEM partners. "Over the last couple of months we have started to see devices that take full advantage of Windows 8 and expect to see more devices across more attractive price points over coming months," he said.

These new devices will include some with new Intel chips that are expected to give them performance boosts and improved battery life, he said. A new line of small, touchscreen Windows devices is on the way, Klein said.

Likewise, the number of applications in the Windows Store has increased six-fold since it launched last October, and the catalogue will continue to grow, he said.

Microsoft also plans to improve the buying experience in retail stores through efforts such as better training and incentives for salespeople, he said.

"Growth in Windows depends on our ability to give customers the exciting hardware they want at the price points they demand and a wide array of apps and services," he said. "We're hard at work with our partners to meet these goals and are confident we're moving in the right direction."

Interviewed before the earnings report, Gartner analyst Michael Silver said that the new OS was rushed out before it and its software and hardware ecosystem were ready.

Feeling it had to ship Windows 8 in time for the holiday season last year, Microsoft released the OS and its Windows RT version for ARM devices, but key PCs and applications weren't available.

"Windows 8 wasn't as finished as it could have been or should have been for Microsoft to ship, but it was either ship what they had or go to the holiday season with just Windows 7," he said. "Microsoft blew it with the Windows 8 launch: With the dearth of applications, with hardware vendors that ran late in terms of getting their good machines out for Windows 8."

In particular, Silver has found the marketing strategy for Windows RT and for the company's Surface tablet "incredibly confusing, assuming they have one." It hasn't been clear that Windows RT in its current form and the first version of the Surface, which ran that OS, were better suited for consumers, and that the Surface Pro, which runs Windows 8 and shipped in February, is a better fit for enterprises.

Regarding Windows RT and the Surface tablet, "Microsoft hasn't articulated anything that makes organizations understand what they should be doing, or make consumers understand this is a device for them," Silver said.

As a result, Silver views Windows 8 and Windows RT as "transitional products" that will get polished in the second half of this year, including with new and better devices to run on.

"A lot of that will be rectified for this holiday season. It won't solve the problems of the PC industry, but the decline in PCs doesn't make Windows irrelevant when the typical organization needs Windows to run 45 percent of their applications," he said.

For now, enterprises are looking at Windows 8 for specific uses, primarily for deployments of tablets to employees, Silver said.

Juan Carlos Perez covers enterprise communication/collaboration suites, operating systems, browsers and general technology breaking news for The IDG News Service. Follow Juan on Twitter at @JuanCPerezIDG.

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